Wildcat Currencies

Millions of people spend a significant part of their life behind
computer screens that keep them in one fantasy world or another.
Examples are "Magic the Gathering" and EVE. To those, like myself,
who cannot imagine this: imagine the board game of
Monopoly blown up to computer and internet proportions. That is,
not confined to space or time: partners can be found at any of time
of day or night from among thousands looking for partners at any
one time. The game can be paused at any time to be resumed at any
later time with any partners. A player going broke may be so deeply
involved and resolved not to repeat this or that dumb move,
that he is prepared to cheat. Such cheating takes to form
of buying game money for US dollars paid from his VISA account.
Lately Facebook has entered the business by hosting third parties
with their own games for Facebook clients to play among each other.
Facebook provides the servers and the financial infrastructure in
return for a generous percentage of the US dollars involved.

In 2012 Facebook clients spent 800 million US dollars on play money.
Older forms of virtual currencies, such as airmiles and similar
credits in customer-loyalty currencies, are estimated by the European
Central Bank to exceed the amount circulating in notes and coins
of state-sanctioned currencies.

I expected BitCoin to play a prominent role in this book. It is
mentioned and dismissed in passing. Now I realize why I was excited
about BitCoin: it is a technological marvel and I wish I had the
technical insight and programming acumen to bring something like
this about. But in the larger scheme of things it is insignificant,
as it represents a step back in the evolution of mediums of exchange.
It manages to simulate gold with advanced technologies of cryptography
and network protocols. Technologically advanced, but backward from
the point of view of economics and markets.

I have contrasted "real" money in the form of US dollars or Euro's
with the play money created in online games. But how real is this
"real" money anyway? In the course of the 19th century most money
migrated from notes and coins to become entries in ledgers of banks;
in the course of the 20th century these entries became tiny quivers
of electricity in computers. It is a sophisticated art to keep the
value of this virtual stuff reasonably stable so as not to wreck
the economy. This is the task of central banks and it is made harder
by political pressure and legislative legacy.

Since the play money of computer games can be exchanged with official
currencies, play money has a value outside the games. Managers of
computer games find it in their interest to keep this value stable.
Through programming errors and errors of judgment spectacular
instabilities have occurred. As these are corrected, and insofar
as the games survive them, valuable experience is gained. Knowledge
about currency management is established worthy of the attention
of a John Maynard Keynes. Experience and knowledge accumulates in
the form of mechanisms called "faucets" (money creation) and "sinks"
(ways of removing money from circulation). Here the game world is
touching economics bedrock.

Having reached bedrock, Castronova reviews the official characterization
of money:

It is a medium of exchange.

It is unit of account.

It is a store of value.

For this reader at least, it was useful to be reminded of this piece
of Economics 101. I had always been puzzled why The Economist (the
newspaper) was in recent years frequently raising the spectre of
deflation. As a pensioner, zero inflation seemed to me a worthy goal
for central bankers and an occasional bit of deflation to offset
the inevitable occasional excursion to the other side seemed perfectly
OK.

This is wrong because deflation rewards keeping money uninvested.
Because of this even the German-dominated European Central Bank
aims at a bit of inflation: an incentive is needed to prevent money
accumulating in unproductive pools.

So far some useful economics instruction from Castronova. I now
venture beyond and speculate about the drastic measures needed to
get the world, our part at least, out of its economic doldrums. In
a general way what is needed is a simplification of all flavours
of banking, central and otherwise. Specifically, now that we are
reminded of the above characteristics of money, the thought arises
that number 3, Store of Value, is the cause of much damage. This
uncertain business of aiming at just the right amount of inflation
leading to expedients like quantitative easing and its ruinous
effects can be finished with a single stroke: drop Store of Value
as a role for money.

This does not mean I advocate galloping inflation: on the contrary
I advocate zero inflation (and zero deflation). I propose to prevent
deflation by making it impossible for banks to offer savings accounts.
In the proposed situation, clients can use a bank for safekeeping
of their cash, but will be charged for whatever it costs. The only
alternative is to invest.

This is not the place to elaborate on the evils of government-backed
deposit insurance or the moral hazard for banks that are "too big
to fail". Suffice it to say that a mere critical examination of the
Holy Trinity of economics points the way a drastic cleaning up of
the financial and economic mess that we have worked ourselves into.
Kudo's to the crazies of the computer gaming world and Edward
Castronova to show a way out of the deadlock.